Corporates and real money funds have been lapping up dollar/yen options over the past week as the yen threatens to strengthen further against the greenback and volatility on the currency pair spikes. Volumes in dollar/yen options have been around 50% higher in the past week compared to a few months ago, while customer flows have almost doubled, according to one options trader. The big question on the currency pair is whether the Bank of Japan will step in to support the dollar, noted another trader. Last Wednesday the yen was trading at a several month low of JPY116, compared with JPY117 the week before.
Equity funds and real money accounts that had been underweight Japanese equities for some time pushed up the yen as they pumped money into the country, said the trader. As yen depreciates, options are being purchased for hedging reasons, he said. In particular there has been a huge bid to buy low delta yen calls/dollar puts with short tenors and strikes of JPY114-115, he noted.
While the general belief is that the BoJ will step in to support the exchange rate it may not do so immediately and a panic may ensue in the interim, said the trader. Cash flows into Japan are not expected to dry up any time soon, he added.
